Implied Volatility from Asian Options Via Monte Carlo Methods

International Journal of Theoretical and Applied Finance, Vol. 12, No. 2, pp. 153-178, 2009

Posted: 2 Dec 2009

See all articles by Zhaojun Yang

Zhaojun Yang

Southern University of Science and Technology - Department of Finance

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Yajun Xiao

University of Freiburg - Department of Economics

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Abstract

We discuss how implied volatilities for OTC traded Asian options can be computed by combining Monte Carlo techniques with the Newton method in order to solve nonlinear equations. The method relies on accurate and fast computation of the corresponding vegas of the option. In order to achieve this we propose the use of logarithmic derivatives instead of the classical approach. Our simulations document that the proposed method shows far better results than the classical approach. Furthermore we demonstrate how numerical results can be improved by localization.

Keywords: implied volatility, Monte Carlo simulation, Asian options, exotic options, calibration, local volatility

Suggested Citation

Yang, Zhaojun and Ewald, Christian-Oliver and Xiao, Yajun, Implied Volatility from Asian Options Via Monte Carlo Methods. International Journal of Theoretical and Applied Finance, Vol. 12, No. 2, pp. 153-178, 2009 , Available at SSRN: https://ssrn.com/abstract=1515448

Zhaojun Yang (Contact Author)

Southern University of Science and Technology - Department of Finance ( email )

No 1088, Xueyuan Rd.
District of Nanshan
Shenzhen, Guangdong 518055
China

HOME PAGE: http://faculty.sustc.edu.cn/profiles/yangzj

Christian-Oliver Ewald

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Yajun Xiao

University of Freiburg - Department of Economics ( email )

Freiburg, D-79085
Germany

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